How Much is Too Much?
Credit card applications. They’re everywhere. They’re in your mailbox and your inbox. They’re at your favourite grocery store and your favourite bookstore. The applications look tempting: 0% APR for the first 6 months, 3% cash back on all major purchases, or $50 off your next purchase.
You may already have several credit cards in your wallet right now. Perhaps you’ve even maxed out one or two. Would it be harmful to apply for yet another card, if only to enjoy some of its perks?
Understanding Your Limits
Before you sign your name to the bottom of that credit card application, it’s important to understand the limits that come along with your card. While you could potentially own an unlimited number of credit cards from a number of banks, keep in mind the following limits.
Personal Limit
According to statistics provided by the Canadian Bankers Association, Canadians held an average 74.5 million Visa and MasterCard credit cards in 2011. This averages to about 3 cards per adult—for just Visa and MasterCard. With countless retail stores offering their own credit card programs, it’s no wonder that our wallets are bulging even without the cash.
For the most part, we do a fairly good job at paying off credit card debt. Nearly 70 percent of Canadians pay their credit card balance in full each month so their interest rate is zero. And nearly 55% pay a lot more than the minimum required payment.
However, Alberta residents hold the second highest household debt in Canada. Average consumer debt in our province is $36,223. Credit card debt accounts for about 5.5% of that total household debt. If you’re a high spender, applying for another credit card may be an open invitation to increase your debt. While opening another line of credit may temporarily boost your credit-to-debt ratio, it won’t do you much good if you max out yet another card. Additionally, you may find it difficult to keep track and pay off multiple credit cards if you’re not organized. With multiple cards, you may easily miss a payment, which can hurt your credit score.
Recognize your personal limits and only apply for credit that you need.
Banking Limits
While most banks don’t set a limit on the number of cards you can have, they can (and often do) set a limit on your total line of credit.
For example, you have two cards from your current bank, and they both have a limit of $10,000. This totals to $20,000 in total credit, which happens to be your bank’s credit limit. Now imagine your bank just opened a new line of cards with a special rewards program. You want to add it to your portfolio so you can enjoy its benefits. However, if you apply for the new card, your bank may reject your application. Not because you already own two cards, but because you already have reached the bank’s limit in credit.
To apply for the new card, you may have to reduce the limits on your other two cards or close one of the accounts.
Should You Close Excess Accounts?
If you have difficulty managing multiple credit cards, or if you’ve reached the credit limit on your bank, you might be tempted to close one of your extra accounts. While closing an account doesn’t necessarily hurt your score, it doesn’t help it either. Length of credit history affects your credit score. The longer you have an account open, the better it is for your score. It’s better to pay off older accounts to keep your credit card active than to transfer existing debt to a newer account.
If You’re Maxed Out on One Credit Card, Should You Apply for Another?
Credit cards are not a magic ticket for a carefree lifestyle. Every time you use your credit card, you promise to pay the amount, as well as any interest. If you max out a credit card, you still have to pay that debt, even if you open another line of credit and never use your old card again. If you try to use your new card to pay your old card, you buy yourself time, but the debt is still there. Eventually you’ll have to pay it. It’s better to pay the old card and keep an older account active than to constantly cycle through new cards.